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Supreme Court Recognizes, Limits SEC’s Disgorgement Power

Three years ago, the Supreme Court ruled in Kokesh v. SEC that disgorgement in the context of an SEC enforcement action functions as a “penalty” for purposes of 28 U.S.C. § 2462 and is therefore subject to a five-year statute of limitations. 581 U.S. ___ (2017). In practice, the effect of Kokesh for companies and individuals under investigation by the SEC – including for potential violations of the U.S. Foreign Corrupt Practices Act (FCPA) and other securities laws – was that the potential disgorgement to the SEC from any securities fraud or bribery schemes was limited to only five years, regardless of the duration of the scheme. In a footnote, however, the Court left open the possibility for a future challenge to the SEC’s ability to obtain disgorgement as a form of equitable relief.

On Monday, in Liu v. SEC, the Supreme Court addressed this question, holding that such authority exists but that it is subject to certain conditions. Writing for an 8-1 majority, Justice Sotomayor’s opinion in Liu held that in an SEC enforcement action, disgorgement is permissible as equitable relief provided that it does not exceed the net profits from the scheme and it is awarded for the victims of the scheme.

The petitioners in Liu, a husband and wife, were charged with securities fraud for allegedly misappropriating nearly $20 million of the almost $27 million raised from investors to fund construction of a new cancer-treatment center under an EB-5 immigrant investor program. The District Court found for the SEC, imposed a civil penalty, and ordered disgorgement of the full amount the petitioners raised from investors. The petitioners objected to the disgorgement, arguing that certain business expenses should have been deducted from the award. The District Court disagreed, and the Ninth Circuit subsequently affirmed the lower court’s ruling concluding that the “proper amount of disgorgement in a scheme such as this one is the entire amount raised less the money paid back to investors.” The Supreme Court granted certiorari to determine whether the statute applicable to federal district court actions, 15 U.S.C. § 78u(d)(5), authorized the SEC to seek disgorgement.

After addressing this question in the affirmative, the Court nevertheless went on, in dicta, to cast doubt on certain SEC enforcement practices:

  • The Court questioned the SEC’s practice of depositing disgorgement awards into the U.S. Treasury, as opposed to distributing them to victims. Observing that the statute requires the SEC to “do more than simply benefit the public at large by virtue of depriving a wrongdoer of ill-gotten gains,” the Court suggested that disgorgement may not be appropriate in certain instances where funds would not go to victims themselves.

  • The Court also criticized the SEC’s practice of imposing joint-and-several disgorgement liability, which the Court indicated should be limited to situations where there is concerted action among wrongdoers. The Court identified several factors in determining whether joint-and-several liability may be appropriate, including whether there is commingling of finances and whether one party is “a mere passive recipient of profits,” among others.

  • Having vacated the disgorgement awarded by the District Court, the Court noted that legitimate business expenses must be deducted from any disgorgement award, including any expenses that have some legitimate value independent of the fraud scheme.

The effect of Monday’s decision on SEC investigations and enforcement actions remains to be seen, in part because the case was remanded to the lower courts for further proceedings. Nevertheless, for companies and individuals that find themselves in the SEC’s crosshairs, there are several implications of the framework set forth in the Liu dicta:

  1. There is likely to be an impact in the many SEC investigations where victims are not easily discernable, such as those involving insider trading, accounting fraud, and FCPA violations. But any impact may be lessened in parallel civil/criminal investigations where defendants resolving a case would still likely have to return ill-gotten gains, albeit in the form of a criminal penalty paid to the U.S. Treasury.

  2. In corporate investigations, the SEC will likely need to examine more carefully whether the parent entity acted in concert with the foreign subsidiary where wrongdoing may have occurred in order to justify the imposition of joint and several liability.

  3. And finally, there will likely be more negotiation between the SEC and potential defendants over the degree to which expenses are legitimate or merely “fuel[ed] a fraudulent scheme.”

Although Liu will not cause the SEC to curtail its practice of seeking disgorgement, it will force the agency to adhere to the guidance provided by the Court to ensure that the practice is in line with equitable principles. It may also reverberate in other enforcement areas, as other agencies authorized to seek disgorgement – such as the U.S. Federal Trade Commission and the Commodity Futures Trading Commission – assess their approach to disgorgement in light of Liu.

For more information on disgorgement and other potential SEC enforcement actions, as well as the FCPA, reach out to any of the authors or your Foley & Lardner attorney.

Note: David Levintow, a Summer Associate at Foley & Lardner LLP, is a contributing author on this piece.

© 2020 Foley & Lardner LLPNational Law Review, Volume X, Number 176



About this Author

Rohan Virginkar, Foley Lardner Law Firm, Washington DC, Government Enforcement Attorney

Rohan Virginkar is a former federal prosecutor and a member of the Government Enforcement Defense & Investigations Practice in the Washington D.C. office of Foley & Lardner LLP. His practice focuses on advising corporations and executives on government and regulatory actions; conducting internal investigations; leading corporate compliance matters; and representing individuals and corporations in white collar matters and investigations by the U.S. Department of Justice, United States Attorney’s Offices, the U.S. Securities and Exchange Commission, and other...

David W. Simon, Foley Lardner, Government Matters, FCPA Attorney

David W. Simon is a litigation attorney who devotes much of his practice to helping corporate clients avoid and manage crises that potentially give rise to government enforcement actions. He provides compliance advice, conducts internal investigations, defends companies against enforcement actions, and represents companies in litigation.

The Foreign Corrupt Practices Act (FCPA) is a principal focus of Mr. Simon’s practice. He also has extensive experience representing clients in antitrust matters and in defending False Claims Act investigations...

Olivia Singelmann Government Enforcement Attorney

Olivia Singelmann is an associate and litigation attorney with Foley & Lardner LLP. She is a member of the firm’s Government Enforcement Defense & Investigations, Business Litigation & Dispute Resolution, and Securities Enforcement & Litigation Practices.

Olivia’s practice includes litigation matters, with a focus on representing clients in investigations and/or enforcement proceedings by the Department of Justice (DOJ), the Securities and Exchange Commission (SEC), and the Public Company Accounting Oversight Board (PCAOB). Olivia has experience representing...

Thomas J. Krysa Litigation Attorney Foley & Lardner Denver, CO

Thomas J. Krysa is a partner and litigation lawyer with Foley & Lardner LLP. Tom is based in the firm’s Denver office where he is a member of the Securities Enforcement & Litigation Practice. His practice focuses on advising clients in securities enforcement and litigation matters, government investigations, and complex commercial disputes. Tom, a former SEC senior officer and federal prosecutor, brings extensive government experience to the forefront to solve his clients’ problems short of government action, while at the same time preserving their interests should litigation and...

Brooke Clarkson, Foley Lardner Law Firm, Litigation Attorney

Brooke D. Clarkson is senior counsel with Foley & Lardner LLP, where she is a member of the Securities, Enforcement & Litigation Practice.

During law school, Ms. Clarkson was a summer associate with Foley, where she focused on securities litigation, government agency decisions, and regulatory standards. Prior to entering law school, she worked in the District Attorney’s Office of New York County, NY in the Frauds Bureau as a trial preparation assistant where she was involved in the prosecution of major white collar crimes. Her work...